Moody's Downgrades Penn's Credit Rating Because of Losses by Its Health-Care Arm
By MARTIN VAN DER WERF
Moody's Investors Service has downgraded the credit rating of the University of Pennsylvania, citing continuing financial losses by its hospitals and School of Medicine.
The academic performance of the university is exceptional, the credit agency said, but "severe managed-care pressures" have forced the health-care arm to borrow $120-million from the university over the last 18 months, sapping some of its financial strength.
The university's rating was lowered from Aa2 to Aa3. That is the lowest rating to be considered a "high-grade" bond. Moody's rating for the University of Pennsylvania Health Services system was lowered from A1 to A2. That is two steps below the university's rating.
The lower credit rating did not surprise university officials.
"Over 50 per cent of our revenues come from the health system," said Kathy J. Engebretson, vice-president for finance at Penn. "So we expect when there is financial pressure at the health system, we are going to feel it throughout the university."
Nevertheless, a downgrade in credit rating is unusual for an institution that is doing so well. Indeed, the Moody's analysis calls the university "among the most prestigious in the country." Penn accepted fewer than 30 per cent of applicants for fall 1998, its most-selective rate ever. It ranks among the top 20 universities in the nation in the amount of research money it is receiving. However, the university will at best break even in fiscal 1999, and may have operating losses for several years, says the Moody's analysis, which was released on Monday. The university and health system combined have $1.43-billion in debt.
Through the first six months of this fiscal year, Penn's health system reported a $33-million loss. That was an improvement from the $53-million loss in the comparable period the year before. The losses have been pared because the health system has signed up more physicians and patients in the wake of the bankruptcy last year of the Allegheny Health, Education and Research Foundation, another health-care network based in Philadelphia.
"In the short run, the Allegheny situation has helped us," said Ms. Engebretson. With increased volume and a cost-reduction program, the Penn health system hopes to break even in fiscal 2000, which begins on July 1.
But Moody's casts doubt on that goal. The credit agency says the reduction in losses may slow because the two dominant health-maintenance organizations in Philadelphia, Independence Blue Cross and Aetna/U.S. Healthcare, are reducing and slowing payments, denying more requests for care, and reducing reimbursement for outpatient services.
Penn's situation is similar to that of Georgetown University, which had its credit rating downgraded by Moody's in December and by Standard & Poor's, the other major credit-rating agency, in February. Both agencies cited losses by Georgetown's hospital and School of Medicine. Georgetown is looking to sell its hospital or to affiliate with another health-care provider.
Ms. Engebretson said Penn would consider other options for operating its medical school, four hospitals, and physician network. Other universities that have encountered financial trouble with their hospitals have sold them, spun them off into separate corporations, or merged them with other providers.
"Our preference would be to keep the health system and School of Medicine integrated," said Ms. Engebretson. "But I think we would be foolish in the current climate not to look at other models."
Standard & Poor's officials have not changed their ratings on Penn since last year, but they are scheduled to meet with university officials in early April to review the institution's financial situation.